House Passes Important Housing, Refinance and Foreclosure Avoidance Assistance in Economic Stimulus Bill

Source: House Financial Services Committee
Date: January 31, 2008

Washington, DC - The House of Representatives overwhelmingly passed provisions this week to help consumers take advantage of increased mortgage market credit, stabilize the housing market and help homeowners refinance out of bad loans. The legislation, passed as part the economic stimulus package, will allow the Federal Housing Administration (FHA) and the Government Sponsored Enterprises (GSE) of Fannie Mae and Freddie Mac to temporarily increase their loan limits to serve a greater number of areas of the country. In fact, by making these changes to the FHA and the GSE programs, Congress is making more financing available to a large number of moderately priced homes in many communities across the country. In addition, the bill raises artificial caps, which effectively prohibits the use of FHA and GSE loans in higher priced markets such as Massachusetts, California and New York.

One-year Increase in FHA’s Ability to Guarantee More Loans. Currently borrowers in many parts of the country are cut off from FHA financing. This revision would boost FHA loan limits to 125% of an area’s median home price (but not to exceed $729,750) for 2008. This will provide needed mortgage financing to borrowers in markets where such funds are currently unavailable or limited. According to a 2007 GAO report, during the recent housing boom (where the number of nationwide loans rose), the total number of FHA loans fell from 763,584 in 2001 to 286,470 in 2005. “FHA’s market share in terms of numbers of loans fell from 19 percent in 1996 to 6 percent in 2005, with almost all of the decline occurring since 2001.” This will help FHA return to its traditional role in housing finance.

Temporary Increase in GSE Conforming Loan Limits. Similarly, the stimulus package will provide for a temporary increase for the GSEs conforming loan limits to match the new levels established for the FHA. Currently Fannie Mae and Freddie Mac are only able to purchase loans under $417,000. Loans with balances above that limit have fewer buyers and are significantly more expensive and difficult to finance. Even when financial institutions are willing to make these loans, because there is no secondary market for them, they cannot sell the loans and fund new ones. By permitting the GSEs to buy these loans, this change would provide vital liquidity to mortgage markets where funds are currently unavailable or limited.